Two Dividend Paying Beer Stocks to Cure Your Inveting Hangover

Anheuser-Busch  (NYSE: BUD  ) has operations in 120 countries around the globe. The company's top markets are North America, Latin America North, and Asia with no region completely outshining another on a sales basis. Molson Coors  (NYSE: TAP  ) has four operating segments; Canada, the U.S., Europe, and Molson Coors International, or MCI. Molson Coors receives the bulk of its revenue from the U.S., which works against it since Anheuser-Busch is more diversified in its operations on a sales basis.  

Anheuser-Busch is a behemoth in the global alcoholic beverage industry. It is an industry leader with 2013 revenue reaching $43 billion, a market cap of $170 billion, and a dividend yield of 3.6%. Molson Coors is also one of the top brands in the beverage business with a range of its own brands and partner-owned brands. Molson Coors is much smaller than Anheuser-Busch with a market cap of $10.7 billion, 2013 revenue of $4.2 billion, and a dividend yield of 2.5%. 

Dividend overview
For long-term dividend investing we want companies in stable industries that perform well in all market conditions.  These types of companies are generally understood to be in defensive industries such as consumer goods and more specifically in this case, alcoholic beverages.  Attributes of companies that continually increase dividends include: being in a dominant or niche market position, have global operations, high return on assets (ROA), and low debt ratios so payouts are unlikely to be affected by debt covenants. 

Anheuser-Busch's dividend policy is to payout at least 25% of their profits in the form of dividends while Molson Coors does not state a policy on dividends. 

Here we will look at the past four years:

Company

Metric

2010

2011

2012

2013

Anheuser-Busch

Dividend/share

1.07

1.55

2.24

2.83

 

Dividend growth

 

45%

45%

26%

Molson Coors

Dividend/share

1.08

1.24

1.28

1.28

 

Dividend growth

 

15%

3%

0%

All financial data taken from 20-F's for BUD and 10-K for TAP. Dividend history for TAP taken from Yahoo! Finance TAP page.

The table shows that Anheuser-Busch is beating Molson Coors on a growth basis, but I will demonstrate how high growth rates may not be sustainable. 

Payout ratios over four years with averages: 

            Payout ratio = dividends paid / net income

Company

2010

2011

2012

2013

Average

Anheuser-Busch

30%

31%

38%

28%

32%

Molson Coors

28%

34%

53%

41%

39%

Anheuser-Busch has beaten its 25% payout target with an average of 32% over four years. Both companies pay out a solid chunk of earnings compared to the alcoholic beverage industry average of 17.61% and its average dividend yield of 1.07%

Getting tipsy from sky-high margins
Both companies have some impressive margins on a gross, operating, and profit basis. High margins matter for dividend investors because it means solid cost and price management with more cash to be left over to continue the current payout or increase it.

Anheuser-Busch's four year average gross, operating, and profit margin are 57.7%, 31.6%, and 24.6%, respectively.  With margins this high one would think that Anheuser-Busch would be in a rosy financial position. As put together in the next section and laid out in a previous article on free cash flow (FCF), this may not be the case.

Molson Coors four year average gross, operating, and profit margin are 41.4%, 23.3%, and 11.4%, respectively. Its margins, while still impressive, have shrunken from previous year's highs and have still to recover. The company's steady FCF growth and much smaller size should help margin improvement going forward.

Putting it all together with these three metrics

Company

FCF/dividend

2013

ROA

2013

Debt / total capital 2013

Average

FCF/dividend

Average ROA

Average debt / total capital

Anheuser-Busch

1.6

13%

51%

2.81

11%

53%

Molson Coors

3.73

5%

30%

3.16

5%

27%

1.      Free cash flow coverage = FCF / dividends paid

2.      Return-on-assets = ROA = net income + interest expense / total assets

3.      Debt-to-total-capital = (long-term debt including current portion) / (long-term debt including current portion + total equity)

First up is FCF coverage which is an indicator of how safe a dividend is from decreases or halts and shows how many times FCF covers total dividend payments. Free cash flow is the cash left over after all operating investments have been made. Greater than one is a good sign and both companies have it, but Molson Coors is the clear winner here with over three times coverage. This means the company's FCF covers its total dividend payments more than three times over. Anheuser-Busch has much larger dividend growth rates, but with coverage this low it will not be sustainable. Molson Coors can increase its payout ratio and still have cash leftover.

ROA measures how effectively a company uses its assets to generate returns. We add back interest expense to net income because we want operating returns not including borrowing costs. Anheuser-Busch has the better ROA with more than double that of Molson Coors, although its other metrics make up for this shortfall. In the long run a high debt to total capital ratio can cause concern. Too much debt can limit shareholder distributions due to debt covenant restrictions with debt being more senior to dividend payments. Higher debt ratios mean more cash has to go to debt holders before dividends can be paid. Molson Coors has nearly half Anheuser-Busch's average debt to capital ratio, which would indicate a healthier financial position in the future. Molson Coors' current FCF growth and FCF coverage gives them more flexibility if it chooses to pay down debt or return cash to shareholders.

Foolish Takeaway
For the long-term, Molson Coors is a good candidate for investors looking for an appealing dividend grower. It is not nearly as large as Anheuser-Busch, but still has a solid global reach with good margins. Molson Coors pays out a larger percentage of earnings than Anheuser-Busch, but can afford if with its much higher FCF coverage ratio. All of this coupled with a lower debt ratio makes Molson Coors an attractive dividend stock that warrants further review. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


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